Obama Wins At G20: Europeans Lose Control of IMF

The big news at the G20 was obviously about the IMF, with the Americans pulling out an impressive deal on funding (compare with our predictions…). But the money is not the biggest achivement. The big move was in terms of who will run the IMF in the near future – as I explain my NYT.com column this morning, there is an implicit and almost immediate shift towards emerging markets.

President Obama had just the right tone yesterday.  Admittedly, he was helped by the fact that we no longer have anything to be arrogant about, but still the way he reached out to other countries – while also pointing out that they made big mistakes and are currently in trouble – conveyed exactly the right message.  The US will do much better if it lets emerging markets and developing countries have a serious and permanent place at the big table. 

Among other things, this will fundamentally change the way the IMF operates.  As a symbol and for its potential impact on the international economy moving forward, yesterday’s final loss of European control over the IMF really matters.

By Simon Johnson

20 thoughts on “Obama Wins At G20: Europeans Lose Control of IMF

  1. The headline surprised me: “Europeans Lose Control of IMF” I didn’t know that it was the Europeans who (previously) called the big shots. I thought it was the US and that nothing substantial could be done against/without them at the IMF.

    Having the ooportunity to ask an expert: Simon, what was ther previous power balance at the IMF, what will it be likely in the future? Could you give some percentages (of power, not of the money in it)?

  2. The IMF was Atlantic-centric: the US and Europe controlled it. This was a relic of the post-WWII order, before Asia emerged as an economic powerhouse. This lack of representation for Asian countries made them less willing to come to the IMF, especially after the Asian Crisis of 1997, when the IMF imposed harsh terms on many of the bailouts. The lesson many Asian countries – particularly China- learned from the 1997 crisis was to build up enough foreign currency reserves so that they would never have to go to hat in hand to the IMF for help. This contributed to the massive cash and trade imbalances that helped fuel the credit bubble that just popped.

    The G20 agreeing to make the IMF more representative of today’s economic balance of power, and to give it more funds to bail out emerging markets is probably the most promising sign of policy coordination yet. We could still avoid a global lost decade if we finally deal with the banks and break the bankers.


  3. I agree with HB, premitting leadership from non-European countries at the IMF and expanding the capacity of the IMF to assist emerging market nations “…is probably the most promising sign of policy coordination yet….” It’s probably simply THE most promising sign yet. Now, if we (the US) would only agree to finance our trade deficits through the IMF there’d be less chance of a recurrence of more “…cash and trade imbalances that helped fuel the credit bubble that just popped.”

    Congress would never allow that. If it did, however, wouldn’t that be a step toward establishing the SDR as a global medium of exchange? Is this what the Chinese are hinting at?

  4. Market Failure for lack of regulation, Invisible hand blamed for financial crash and spiraling death of a star
    An unregulated business cycle falls on a pattern of steep booms or expansion,growth and proportionally equivalent steep busts or contraction ,recession, that can lead to a deep depression, the recovery cycle being directly proportional to the size of the initial boom. The final result of the end cycle of the boom is a shift of market power balance, the rate of change in capital accumulation, a shift of purchasing power because of the shift of wealth ,a redistribution of wealth, a concentration of aggregate supply and financial assets in a few hands and an equally inverse diminishing of aggregate demand that is worsened during the bust by a shift in value, assets lost value, fall in real estate prices, salaries ,etc. lost value of Bank financial assets freezes Banks, that increases more the concentration of aggregate supply and financial assets and catastrophically worsened by a government supply sided financial bailout that increases even further the concentration of aggregate supply and financial assets therefore exterminating aggregate demand , creating a freezing or stagnation because the falling rate of profit begins at the lower end of the market distribution chain therefore crashing distribution by finally exterminating aggregate supply also and eventually forcing government to finish the cycle according to the Eisenhower complex scheme or Spiraling death of a star. In order to avoid this a government demand sided approach should be used.
    The problem is fictitious capital if it never existed and is the result of over valued assets because of a market manipulation by speculative gambling strategies that artificially inflated and drove up the price or value, inflating the bubble, you cant restore its original value unless you repeat the same cycle that pushed their false value during the boom.

  5. Good grief, the ‘evil’ Europeans have/had no control in a situation where the US has total veto power. A power that comes with only 16 % of the quota, or so, despite being about 25 % of world GDP.

    In others, the US pays on the cheap, and still gets all the marbles.

  6. I don’t understand why Americans would welcome or support somebody else making investments with their money. How is that in the best interest of America? The same argument goes for all of the countries putting money into the IMF or the World Bank. How does that make sense for the tax payer of the country?

    We are after all talking about serious money. We are also talking about institutions that have been proven to suffer from insular management, tolerance of corruption and lack of accountability.

    On the other hand, it may be that these investments will have a higher return than the upcoming GM or Chrysler investments, or the existing AIG, Citibank and Bank of America investments. Setting a low bar certainly helps to make success achievable.

    Perhaps hope will trimpuh over experience, but this merely looks like another log on the American deficit bonfire.

  7. Mrm, No. There will be no difference in how the World Bank operates. They will continue to be a tool of the Fortune 500 in America. The “World” Bank will continue to insure that the poor of the world will remain poor, and the natural resources of there home lands are available to be stolen. Don’t you get it Mrm? America needs MORE televisions and McMansions…no matter WHAT the residual effects are. So what? A few million people starve to death? So what? Don’t you get it MrM? America needs MORE TV sets!!! MrM, how the HELL do you expect Madonnas stolen children to watch TV, if these people in places like Zimbabwe are allowed to hold onto their natural resources. Geez…some people just don’t get it!!!!!

  8. Purple,
    Actually, the US borrows, but rarely repays. And when asked to repay, they flatly say “no”, screw you Mr. Creditor and begin printing currency. Can you say China, Japan, Saudi Arabia? They use their current (but not for much longer) position as the reserve currency to strong-arm their creditor: you won’t lend us more? OK, we’ll print bills, and kill your holdings. How many times do you think you get to do that? ONCE. But their problems are bigger than that. They can screw their creditors this one time, but they have no manufacturing to speak of, on a global scale. They are, once again, viewing this short term. AS USUAL. They will have two years of “phew, we solved that mess, didn’t we?” Then the whole house of cards that is their economy will collapse again. Watch….you’ll see.

  9. Bill,
    But…didn’t your last Vice President, “Dick”, tell us all that deficits don’t matter? He was right too….well, he was right if your America. Just borrow money, then just refuse to pay it back. That is what you do in America, right?

  10. Oh, and by the way, what do you think your REAL GDP is anyway? Now that the US consumers have stopped borrowing their “equity” (and I use that term loosely) from their homes, to buy TV sets and related garbage, and the world has clearly decided to no longer loan you their savings, exactly how much is your GDP? I mean, the REAL Gdp?

  11. Bill, you could be right. Either the US exports its way out of all the debt or it inflates its way out (in which case ‘amigo’ and Daniel Hannan are right.)

  12. I say we all start working on getting the Federal Reserve Act repealed!

  13. The IMF and World Bank are on top the large pyramid of cards. Not much chance of a meaningful existence past an inevitable, certain point.

  14. Well, there’s winning and, then, there’s WINNING.

    The officious, not official, choice for running the two top banks has been that the IMF goes to a European and the World Bank goes to a Yank.

    Will that change? I suspect that the World Bank will stay with the Americans. So, will the Europeans give up such a prestigious slot, especially the French who have had four of the IMF’s past ten Managing Directors, including the present one?

    Not for some sort of quid pro quo, methinks.

Comments are closed.